Buy into this fear... and more - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Buy into this fear... and more 

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In this issue:
» Inflation creates opportunities for investors
» China follows India...in price hikes
» More gas and less gold
» Pharma big brother in India
»  ...and more!

00:00 Inflation's high, buy into this fear
The fuel prices were hiked by about 10% on June 4 2008 and as expected, inflation (as measured by the Wholesale Price Index) dutifully galloped to a 13-year record of 11% for the week ended June 7, 2008 (up from 8.75% for the week ended May 31). Fuel, power and lubricant prices registered a 7.8% increase, while ATF (aviation turbine fuel) prices surged 14%. The benchmark BSE Sensex 'greeted' the news with a 500-point decline. But we are of the opinion that it is at times like these that the investors should roll up their sleeves in search of fundamentally sound companies going at attractive valuations.

Over the last ten years, inflation has only temporarily affected the returns on equity (ROE) for shareholders. Over the long run, the ROE of the BSE Sensex companies has steadily marched upwards (see chart above).

Also, we must keep in mind that inflation is not particularly a dampener for all sectors alike. Especially because, if high inflation is sustained over a longer term, it discourages savings and encourages consumption, leading to higher demand for consumer items (durables and non-durables).

00:46 Inflation's answer, our investing mantra for the day
Warren Buffett mentions in his 1994 letter to shareholders, "Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%. ...imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist."

  • Also read - More lessons from Warren Buffett

    01:16 China did it too!
    China has hiked the prices of petrol and diesel by least 17% while also increasing power tariffs. The development is on the heels of similar fuel price hikes in India, Malaysia and Indonesia. The reason for such a move is to control the demand for energy in China, which has been insulated from the global price signals due to the state subsidised prices. A similar situation exists in India, another major oil consumer, where the government cushions the energy consumer by heavy subsidies on petroleum products (petrol, diesel, kerosene and LPG). So far, in both the countries, the downstream oil marketing companies have had to bear the brunt of the mounting losses. While the move will help the oil marketing companies cope with their losses, it raises the fear of inflation and hampering growth.

  • Also read - India's fuel price hike

    01:50 Airlines in India raise fares too
    Several Indian airline companies have decided to hike fares by 5% to 20% effective today. While some carriers have increased the basic fares, others have hiked the fuel surcharge. This move is on the back of the hike in aviation turbine fuel (ATF) prices by oil companies last month and the subsequent refusal of state governments to reduce sales tax on the fuel. The absolute price hike per trip is in the region of Rs 100 to Rs 1,000.

    At this juncture, the airline operators have two options. The first is to increase fares thereby reducing the market size of air travel and concentrate on snatching market share from other operators. The other option is to keep the airfares low thereby increasing market size and build sufficient volumes to make the industry profitable down the road. Something the telecom players have perfected over these years.

  • Also read - Indian aviation's earlier fare hike

    02:27 Gas will fuel India
    As per the latest figures released by the Ministry of Petroleum, domestic production at 79 million standard cubic meters per day (mmscmd) and 32 mmscmd from LNG imports met about 60% of India's gas demand in FY08. Going forward, domestic production is expected to more than double to 170 mmscmd by FY12, after Reliance Industries' K-G basin gas reaches peak output. ONGC has plans of producing 52 mmscmd by FY12, up from the 47 mmscmd it produced in FY07. Oil India will contribute 10 mmscmd.

    On the LNG front, India's import is expected to more than double to 23 m tons by FY12 from 9 m tons in FY08 due to the new terminals at Dabhol, Kochi and Mangalore and expansion in the existing terminal at Dahej. Together with 81 mmscmd of LNG, India will have gas in the region of 252 mmscmd in FY12 from 111 mmscmd in FY08. Clearly the future looks sparkling for the Indian natural gas sector, especially for the midstream companies who will be handling all the volumes.

    03:07 Gold at US$ 5000/ounce!
    A UK based investment management firm, Schroder Investment Management Ltd. (SIML), has predicted that gold prices may rise to US$ 5,000 per ounce (around Rs 75,000 per 10 gram) over the next few years (it has not given the exact timeframe for the same). Investors' seeking protection against accelerating inflation has been indicated as the rationale behind this prediction of SIML, which manages US$ 277 bn of assets globally, including US$ 10 bn of commodity assets. Other factors given for these extreme projections for gold prices are increasing demand from global central banks and slowing production of the yellow metal.

  • Also read - 'Gold'en opportunity

    As reported in a leading business daily, world production of gold has declined to its lowest levels since 1937. This is on account of depleting reserves and few new sources of the metal. Against US$ 135 trillion of global stock and bond markets, the total value of gold above ground has reported to be just around US$ 5 trillion.

    We like gold as an investment opportunity from a long-term perspective. However, it is pertinent to be cautious about going overboard on the allocation to this asset class.

    03:53 Steel softens somewhat
    A combination of financial and administrative steps taken by the Indian government and steel companies seem to be working. At least for now, with the average sales price of domestic steel showing a noticeable decline. Flat hot rolled coil prices have fallen from a level of US$ 828 per ton in April 2008 to US$ 774 per ton in June 2008. Long re-bars have fallen from a level of US$ 875 per ton in April to US$ 779 in June. It gets interesting given the global context where prices have risen sharply over the last few months. That explains why there is now a difference of US$ 300 to US$ 450 between domestic prices and FOB export prices.

    However, at the retail level, steel prices have still gone up as the supplies get diverted from domestic consumption to exports. The Indian government plans to take steps to prevent this diversion in an attempt to control the rising inflation that has been stoked by the fuel price hike.

    04:30 Globalisation's side effects
    With the Indian pharma and medical devices industry going places, the U.S. Food and Drug Administration (US FDA) wants to set up an arm in India to monitor the quality of exports to the US. It is already in the process of setting up such an office in the China. Such concerns have arisen after a series of withdrawal of below par products from China last year. The agency has sought an infusion of money from the US Congress to establish its arms around the globe. China will have 3 offices while India will have 2 offices, one each in New Delhi and Mumbai. We wonder if this is an acknowledgement of India's pharma capability or a backhanded compliment to the slack monitoring of Indian regulators?
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